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  • The Invisible Hand

Is there an alternative to socialism and capitalism?

It appears there are significant problems with both socialist and capitalist economies. This post will examine the possibility of a 'third way'.

The effectiveness and prosperity brought by capitalism is often fervently extolled, but a 16.7% poverty rate in the UK is not a sign of startling prosperity. With over half the population earning below £27,200, people aren’t living the life of luxury which a developed country deserves. Those who have benefitted from capitalism foster this devotion, while the rest who are not owners of capital have insufficient economic power to challenge that order.

Evidently, our current capitalist model is a flawed economic system and, since it is clear that the inefficiencies of command economies cannot bring widespread prosperity, in this essay less mainstream and some unknown economic systems will be evaluated. Proposed by economists and philosophers alike, these ideas abandon both capitalist and communist systems and aim to create a third way. Long have communist and capitalist ideas clashed, but perhaps there is another way which can bring the prosperity these systems have failed to deliver.

One such system is ‘autogestion’ or workers’ self-management where work processes are self-directed and self-managed. Unlike the centrally controlled Soviet economy, workers have an input into management which could be through workers’ assemblies, or elections of managers. The closest similarity with our current system is the use of co-operatives which many classical economists have supported such as John Stuart Mill.

Compared to other economic systems this concept is not a far at the fringes of political debate with Jeremy Corbyn, the leader of the opposition, supporting them. Evidently, there are clear benefits to workers with greater autonomy, less exploitation and boosted morale as there is reduced pressure from management which increases productivity. Efficiency could also be achieved by the need to have fewer managers to be employed to oversee the staff and as workers have a stake in the firm they are more likely to work hard to be productive to increase profits.

In a time of desperate productivity stagnation, a boost to efficiency might be what the economy needs to grow faster, but also slow the rate of inflation, which increases real wages and therefore, people’s living standards.

However, giving workers a stake in business won’t increase productivity as an individual worker’s effort will have little effect on profits in a company with thousands of workers and therefore their income. A lack of mutual interest and longer decision making, makes disagreements common and particularly damaging as members often don’t have united goals. One way to overcome this would be to for workers to elect a management board, but this dilutes workers’ autonomy.

Self-management is an interest concept and a viable option for a few individual businesses, but a whole economy based on it would suffer from severe business turmoil and a lack of mutual interest means cooperation could be limited.

Another more mainstream idea is dirigisme or state capitalism, where the state directs business investment such as in China where state-backed companies make up 80% of their stock market. Although, at first, it appears an oxymoron, it does facilitate enterprise and state investment simultaneous. Although, the Chinese government exerts strong control, there is yet to be an economy where government directs all investment.

Apple factory in China

Anyone with a vague idea of the economy in China will see that the benefits are obvious; over 6% GDP growth and no threat of inflation. Companies have access to government resources and their seal of approval, but most importantly business investment can be maintained even during a crisis. Here lies an opportunity for continuous growth and a possible ending of the economic hardship causes by crises. Perhaps greater growth is what is needed to raise incomes and standards of living?

Many resent the lack of freedom government direction could cause; it would not just be unfair, but economically damaging. Without the freedom to pursue the profit motive, innovation and productivity is likely to fall and there could be gaps between supply and demand: business investment is no good in a crisis if there is no demand. It also puts great reliance on the government who will lack sufficient information and may pursue their own interests instead of society’s.

With business directed by government, there would be less incentive to start businesses because entrepreneurs won’t retain control so a situation may emerge where monopolies develop which exploit customers by charging high prices and efficiency drops.

Overall, state capitalism is an interesting idea with huge potential for success. As it is untested it is hard to make definitive conclusions, but in the hands of a competent government, such as China’s, it might work.